An EMI (equated monthly instalment) is the fixed amount you pay every month on a loan until it is fully repaid. Each EMI covers that month's interest plus a slice of the principal, and because the interest is charged on the balance still outstanding, the split shifts in your favour over time. This guide explains the formula, works through two real examples, and shows how tenure, interest rate and prepayments change the total you pay.
The EMI formula
EMI = P × r × (1 + r)n ÷ ((1 + r)n − 1)
- P is the principal, the amount you borrow.
- r is the monthly interest rate: the annual rate ÷ 12 ÷ 100. A 9% annual rate gives r = 0.0075.
- n is the number of monthly instalments: 5 years is 60, 20 years is 240.
This is the standard reducing-balance formula used by banks for home, car and personal loans. If the interest rate is 0%, the formula doesn't apply; the EMI is simply P ÷ n.
Worked example: a ₹10 lakh personal loan
Borrow ₹10,00,000 at 9% a year for 5 years. (₹10 lakh is 1 million; our guide to lakh, crore, million and billion explains the conversions.)
- Monthly rate: r = 9 ÷ 12 ÷ 100 = 0.0075
- Number of instalments: n = 5 × 12 = 60
- (1 + r)n = 1.007560 ≈ 1.5657
- EMI = 10,00,000 × 0.0075 × 1.5657 ÷ (1.5657 − 1) ≈ ₹20,758
Over 60 months you pay about ₹12,45,501 in total, of which ₹2,45,501 is interest.
Where each EMI goes
The EMI stays the same, but what it pays for changes every month. In month 1 the interest is 0.75% of the full ₹10 lakh balance, which is ₹7,500, so only ₹13,258 reduces the loan. By the last month almost the entire EMI is principal:
| Month | EMI | Interest | Principal | Balance after |
|---|---|---|---|---|
| 1 | ₹20,758 | ₹7,500 | ₹13,258 | ₹9,86,742 |
| 2 | ₹20,758 | ₹7,401 | ₹13,358 | ₹9,73,384 |
| 3 | ₹20,758 | ₹7,300 | ₹13,458 | ₹9,59,926 |
| 30 | ₹20,758 | ₹4,292 | ₹16,466 | ₹5,55,807 |
| 60 | ₹20,758 | ₹155 | ₹20,604 | ₹0 |
This schedule is called an amortisation table. It is also why prepaying early in a loan saves far more interest than prepaying near the end.
How the loan tenure changes what you pay
A longer tenure lowers the EMI but raises the total interest, often dramatically. Here is a ₹50 lakh home loan at 8.5%:
| Tenure | EMI | Total interest | Total paid |
|---|---|---|---|
| 15 years | ₹49,237 | ₹38,62,656 | ₹88,62,656 |
| 20 years | ₹43,391 | ₹54,13,879 | ₹1,04,13,879 |
| 25 years | ₹40,261 | ₹70,78,406 | ₹1,20,78,406 |
| 30 years | ₹38,446 | ₹88,40,443 | ₹1,38,40,443 |
Stretching the loan from 15 to 30 years cuts the EMI by about ₹10,800 a month but more than doubles the interest, adding roughly ₹50 lakh.
How the interest rate changes what you pay
The same ₹50 lakh loan over 20 years at different rates:
| Rate | EMI | Total interest |
|---|---|---|
| 8.0% | ₹41,822 | ₹50,37,281 |
| 8.5% | ₹43,391 | ₹54,13,879 |
| 9.0% | ₹44,986 | ₹57,96,711 |
| 9.5% | ₹46,607 | ₹61,85,574 |
Every half a percentage point adds roughly ₹1,600 to the monthly EMI and around ₹4 lakh to the total interest. That is why it is worth negotiating the rate, or moving the loan to a lender with a lower one, before you sign.
Prepayments: the fastest way to pay less
A part-prepayment goes straight to reducing the principal. Take the same ₹50 lakh, 8.5%, 20-year loan and make a one-time extra payment of ₹2 lakh after the 12th EMI, keeping the EMI unchanged:
- the loan closes 21 months early (after 219 EMIs instead of 240), and
- total interest falls from ₹54,13,879 to ₹46,84,454, a saving of about ₹7.29 lakh.
After a prepayment most lenders let you either keep the EMI and shorten the tenure, or keep the tenure and lower the EMI. Shortening the tenure saves more interest. Check your loan agreement for prepayment charges: in India, lenders cannot charge individuals for prepaying floating-rate loans taken for personal use, but fixed-rate loans often carry a fee.
Flat rate vs reducing balance: read the fine print
Some lenders, especially for vehicles and consumer durables, quote a flat rate. A flat rate charges interest on the original amount for the whole tenure, even as you repay it.
₹10 lakh at a 9% flat rate for 5 years costs 10,00,000 × 9% × 5 = ₹4,50,000 in interest, an EMI of ₹24,167. The reducing-balance loan above costs ₹2,45,501 in interest with an EMI of ₹20,758. To match that flat-rate EMI, a reducing-balance loan would need a rate of about 15.7%. Always compare loans on their reducing-balance rate or annual percentage rate (APR), never on a flat rate.
Costs the EMI doesn't show
- Processing fees, often 0.5% to 2% of the loan, sometimes with tax added on top.
- Insurance bundled into the loan amount, which you then pay interest on.
- Rate resets on floating-rate loans: when the benchmark rate changes, lenders usually adjust your tenure first, so the EMI stays the same while the loan quietly gets longer.
Calculate your own EMI
Our free Loan & EMI Calculator takes the loan amount, interest rate and tenure (in years and months), in your choice of currency. It shows the monthly EMI, total interest, the principal-versus-interest split and a full month-by-month amortisation schedule. Try a few tenures and rates side by side before you commit.
Frequently asked questions
What is the formula for EMI?
EMI = P × r × (1 + r)n ÷ ((1 + r)n − 1), where P is the loan amount, r is the monthly interest rate (annual rate ÷ 12 ÷ 100) and n is the number of months.
Does a longer tenure reduce the EMI?
Yes, but it increases the total interest you pay, sometimes by more than the original loan amount.
Is it better to reduce the EMI or the tenure after a prepayment?
Reducing the tenure saves more interest. Reducing the EMI makes sense if you need more room in your monthly budget.
How is EMI calculated for a 0% interest loan?
Divide the amount by the number of instalments: ₹60,000 over 12 months is ₹5,000 a month. Check for processing fees, though; "no-cost EMI" offers sometimes recover the interest through a fee or a higher price.